Investing; If the Formula Says Buy, The Big Institutions Buy

DURING the big market declines of recent weeks, many of the biggest investors have been buying stocks. But that may not signal a belief that the market is about to soar.

Instead of selling into a downdraft, as some individual investors appeared to be doing, many major institutions -- including government and corporate pension funds, university endowments, charitable foundations, and religious organizations -- have been compelled by ironclad asset allocation policies to do the reverse. The policies require them to buy stocks when the market knocks the value of their equity positions below a desired level -- say, 60 percent of total assets.

''It's been our experience that institutional investors weren't part of the sell-off,'' said Roger Fenningdorf, a principal at Rocaton Investment Advisors, a Darien, Conn., consultant to institutions. ''I don't think our clients are happy about what's happened to the markets in recent months, but they haven't been panicking, and they aren't giving up on their asset allocation policies.''

This methodical buying, or ''rebalancing,'' by institutions to adhere to asset allocation goals has helped fuel some of the periodic comebacks in the stock market in recent weeks.

''With things in the markets changing as dramatically as they have, we have tended to rebalance by buying stocks and selling bonds,'' said William F. Quinn, the president of AMR Investment Services, the unit of AMR, the parent of American Airlines, that manages corporate pension assets.

Michael T. Flaherman, the chairman of the investment committee for the California Public Employees' Retirement System, or Calpers, the nation's largest pension plan, added: ''When we buy stocks, it's not because we are looking at the market and saying, 'It's the right time.' It's because we are looking at our asset allocation targets.''

Some professionals say individual investors, who tend to be less resolute in forming or keeping asset allocation targets, might do well to adopt such goals, too.

''Institutional investors know that you have to have patience and you have to have a plan, and you have to stick with it,'' said Gail L. Bardin, a principal at Hotchkis & Wiley Capital Management, a Los Angeles-based institutional money manager focusing on value stocks. By contrast, the behavior of many individual investors has appeared to be anything but methodical.

Judging from mutual fund outflows over the last two months, many people were selling stocks priced much closer to their cyclical lows than to their highs. In June, net redemptions for equity mutual funds totaled $10.46 billion, after five consecutive months of inflows, according to AMG Data Services, which tracks fund flows. In the first 25 days of July, the cash outflows totaled $30.6 billion, dwarfing the $23.6 billion withdrawn from funds in the month after Sept. 11.

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To be sure, some people who sold their stock holdings were nearing retirement or had other needs for money and therefore could not afford to take the chance that equity values would fall further. By contrast, institutions have the benefit of investing truly for the long term.

Many people who were disheartened by losses have sold stocks in the hope of returning to the market in a calmer period. They were essentially engaging in market timing, a practice that has also tempted some professionals.

''Some institutional investors have even asked if they should be moving money into cash,'' said Michael Odlum, president of Allied Investment Advisors, an institutional and retail asset manager, based in Baltimore, whose clients include pension funds and religious organizations. ''We have told them that timing the market is a loser's game. When the stock market begins to recover, it happens really fast and you end up missing some of the critical gains if you're out of the market.''

While some institutions, like pension funds, have begun to put some money into alternative asset classes like hedge funds and private equity funds, such moves have generally been limited to a small proportion of their investments. Calpers, for example, has allocated 58 percent of its assets to stocks, 28 percent to bonds and money market funds, and the remainder to private equity funds and real estate.

Thomas McManus, the chief investment strategist with Banc of America Securities, said some institutional investors might have increased their equity stakes more slowly than in previous downturns. But he said that there had been no fundamental shift in asset allocation strategy.

But Mr. McManus also pointed out that the balance of investment power had been shifting over the last two decades away from more disciplined institutional investors and toward more impulsive individual investors, who now have direct control of significant amounts of pension assets through 401(k) retirement plans. The share of total pension plan assets controlled by individuals through defined-contribution plans and I.R.A.'s rose to 46 percent in 2001 from 35 percent in 1990, according to figures compiled by the Investment Company Institute.

''My fear is that individuals have done more damage to their accounts by investing directly,'' he said. ''They hurt themselves by not picking the right manager or right asset allocation.''